Due to the growing interest in cryptocurrencies, the Georgian tax agency has issued a public decision regarding the taxation of cryptocurrency and delivery of computing speed (capacity) operations in Georgia.
The public decision explains:
A) VAT taxation of the supply of crypto assets (exchange operation in national or foreign currency);
B) Taxation of income received as a result of the supply of crypto assets;
C) VAT taxation of the calculated speed (capacity) delivery operation for obtaining a crypto-asset and the issue of deducting the amount of VAT on the goods / services purchased for the said delivery operation.
2. Rationale and legal basis of the public decision
For the purpose of this public decision, a crypto-asset is a digital asset that is stored and exchanged electronically over a single, decentralized, peer-to-peer network, requires no trusted intermediary, and operates with distributed registry technology (Distributed ledger software), which uses cryptographic methods. A crypto-asset is a digital expression of value, it is issued and exchanged through a decentralized consensus mechanism, without a central credible issuer and a supervisory / controlling body, and ownership of it is confirmed by cryptographic methods.
Each unit of cryptocurrency has a market value, it can be issued, owned, transferred to another and divided into parts, it can be bought and sold. At the same time, crypto-assets are not a legal means of payment, nor is electronic money in accordance with Georgian law.
Mining a crypto-asset involves the creation of new structures (blocks) to ensure the functioning of the crypto-active platform, as a result of which the person carrying out this activity (miner) is rewarded with a crypto-asset. This is done on two basic principles: the miner creates a new cryptocurrency in his block (according to a specific algorithm) and this block is confirmed by other miners and / or the miner receives a reward for the executors of transactions. The amount of such a reward can be predetermined, calculated by an algorithm, or determined by the free market. Crypto activity or mining activities require specific equipment and / or software, as well as internet access. The fast and efficient implementation of this activity, among other factors, depends on the appropriate computational speed. Computing speed (power) is a unit of measurement of the power through which a computer performs an operation.
Georgian legislation does not provide any legal definition of cryptocurrency or digital currency. The European Central Bank report published in February 2015 (digital currency schemes – a further analysis) defines digital currency as a digital expression of value not emitted by the central bank, credit or e-money issuer, which, in some cases, may Be used as an alternative to money.
The Ministry of Finance of Georgia shares the above definition of digital currency established by the European Central Bank, which also includes crypto-assets.
It should also be noted that in exchange for cryptocurrency among the members of the relevant virtual community, it is possible to carry out transactions for the purchase of goods and services, and it is actually used as a means of payment. It is also possible to exchange crypto-assets for national or foreign currency.
One of the main principles in the Georgian tax legislation (Regulation on the transfer of ownership of money) is to exclude money supply / transfer of ownership of money from the VAT area, which includes the content of the money alternative – Crypto-asset Delivery / Crypto-asset Ownership Transactions.
A) Therefore, in accordance with Article 13, Part 2 and Article 16, Part 2 of the Tax Code of Georgia, the supply of crypto-assets (exchange of crypto-assets in national or foreign currency) and the transfer of ownership of it is not a VAT-taxable transaction.
Updated 11.01.2021: As a result of the changes in the VAT gate, which came into force in 2021, it was directly written in the Tax Code that the transfer of ownership of money, as well as cryptocurrency (crypto-asset), is the provision of services and not the delivery of goods.
Article 104 of the Tax Code of Georgia defines the list of types of income that are considered as income from a source in Georgia for income / profit tax purposes.
It should be noted that none of the provisions of Article 104 of the Tax Code directly attributes the income received from the supply of crypto-assets to the income received from a source in Georgia.
In addition, it should be noted that a cryptocurrency does not have a physical form, is not located in a specific location, is not deposited in any account with a financial institution, and it is usually impossible to identify its issuer. Also, it is practically impossible to determine the place (territory) of the operation, because the supply of cryptocurrency and its exchange in another currency is carried out in the virtual space, between members of the virtual community, therefore, Income received does not belong to income received from a source in Georgia.
B) Based on the above, on the basis of Article 79, 82, Part 1, Subparagraph “f” and Article 104 of the Tax Code of Georgia, income received by a natural person from the supply of crypto-assets is exempt from income tax.
According to Tax Code of Georgia supply of goods and/or service within the framework of economic activities on the territory of Georgia is a VAT taxable transaction. If the persons receiving and delivering services are in different countries than the place of registration or place of management or the location of the permanent establishment of the person receiving the services if the services are directly related to that permanent establishment are considered as the place of service delivery. This provision also applies to services such as electronic services.
Delivery of computing speed (capacity) meets all the conditions of electronically rendered service, as the aforementioned service is performed automatically, electronically – using information technologies and requires minimal human intervention.
Ca) If the recipient of the electronically rendered service is a person registered outside of Georgia, he / she does not have a place of management or a permanent establishment in Georgia directly related to the received service, according to Article 166, Part 1, Subparagraph “di” of the Criminal Code. For those purposes, the operation of supply of calculated speed (capacity) for obtaining crypto-assets (electronic services) shall be considered outside the territory of Georgia and shall not be subject to VAT in accordance with Article 161, Part 1, Subparagraph A of the Tax Code.
In addition, according to Article 174, Part 2, Subparagraph “ag” of the Tax Code, the amount of VAT paid or payable on goods / services purchased for the provision of the mentioned services outside the territory of Georgia is considered subject to deduction.
Cb) if the recipient of the electronically rendered service is a person registered in Georgia or has a place of management or permanent establishment in Georgia directly related to the received service, for the purposes of VAT, according to Article 166, Part 1, Subparagraph “di” of the Tax Code; In order to obtain cryptocurrency, the transaction of supply of computed speed (capacity) (electronic service) shall be considered as performed on the territory of Georgia and in accordance with the first part of Article 161 of the Criminal Code, shall be considered as a transaction subject to VAT.
In addition, according to Article 174, Part 2, Subparagraph “a” of the Tax Code, the amount of VAT paid or payable on the goods / services purchased for the provision of the said services is subject to deduction.
According to tax agency public decision and Georgian legislation: